Many countries have been looking again at their ability to block acquisitions when they threaten national security. For example, we reported on a change to German law in July last year, and a European Commission proposal (which would cover all EU member states) in October. Most recently, a new law in the United States has increased the power of the Committee on Foreign Investment (CFIUS) to block deals. Such rule changes – often triggered by a controversial foreign acquisition – are understandable, but investors need to know the process and timeline. Vague tests, long clearance procedures or excessive look-back periods can put off investment that would otherwise benefit the economy, and legislators must try to find the right balance.
It is against that backdrop that the UK government issued its proposals for legislative change in July, with a request for comments by 16 October. The government is clearly very aware of the need to maintain an open approach to inward investment, and these proposals are actually the culmination of a thoughtful process that began in 2016. However, the UK does intend to make significant changes that would give it renewed powers to block mergers and acquisitions that could have an impact on national security, and will significantly increase the number of deals that are either blocked or approved subject to conditions. At the moment, the government says that it blocks about one deal each year; in the future, it expects to take some action in around 50 cases. Private equity and venture capital firms will be particularly interested in the detailed rules and related guidance (and the BVCA will be responding to the consultation on behalf of the industry), because many of their investments could fall within the purview of the new regime.
Under the proposed rules, any deal where an acquirer obtains “significant influence or control” over an entity (or an asset), or 25% of its shares (or 50% ownership of an asset), is potentially within scope, irrespective of turnover or market share. Deals affecting “national security” are covered, but national security is not specifically defined. An accompanying (Parliament-approved) “statement of policy intent” will set out some parameters (a draft of this has also been published), but it is clear that “national security” is not limited to questions of defence, and will cover a wide range of industries and activities. For that reason, it is likely that there will be considerable uncertainty surrounding a significant number of deals.
To meet that concern, parties will be allowed to seek preliminary (non-binding) advice, and encouraged (but not obliged) to make a formal pre-notification if they consider that the deal could have an impact on national security. The government claims that it will “quickly” screen out deals that do not cause any concern (within 15 working days, although with an option to extend by a further 15 working days). The breadth of the government’s discretion, and its ability to call-in (and potentially require the unwinding of) any deal that is not pre-cleared, will obviously push parties towards clearance, especially in the early years. The government has estimated that around 200 deals will be notified each year, but many argue that is an underestimate: acquirers are likely to proceed conservatively and notify any deal that raises doubt.
There will be a full review of any deals not screened out during the initial period. In addition, the government will have the ability to review any deal that has not been voluntarily notified in advance, and in relation to which it identifies concerns, within six months of completion. It is envisaged that this review will take up to 30 working days, but this could be extended to 75 working days if needed. Beyond that, any extensions would be by agreement with the parties. If the deal is found to have an unacceptable impact on national security, there will be a range of remedies available. However, if no remedy will eliminate the government’s concerns, there will be a power to block the transaction or, if already completed, to order the parties to unwind it. Clearly there is the potential for significant disruption.
It seems clear that the UK government is determined to take these proposals forward, but is open to comments on the detail. In that regard, respondents will be focused on getting as much clarity as possible on the relevant trigger events, so that meaningful assessments can be made by advisers to minimise the need for pre-clearance. In particular, some well-defined safe harbours would be welcome – especially for those where the acquirer is an investment fund and the ultimate investors are passive. There are also concerns about the confidentiality of the process, and of the information provided as part of the review, particularly when the companies involved are private.
The timetable for the reform is unclear (since primary legislation is needed, and the government has its mind on other matters at the moment), but when these changes eventually hit the statute book, and whatever tweaks are made to the detail, these reforms are going to have a meaningful impact on deals – and investors will have to factor them into deal timetables.
This post comes to us from Debevoise & Plimpton LLP. It is based on the firm’s memorandum, “European Funds Comment: The UK’s Proposed National Security Review for M&A Deals,” dated October 5, 2018, and available here.